Warrant Coverage

What is ‘Warrant Coverage’

Warrants are issued to shareholders in exchange for a percentage of the dollar amount of the shareholder’s investment, according to an agreement between a corporation and its shareholders.

Explaining ‘Warrant Coverage’

Example: If an investor purchases 1,000,000 shares of stock at $5 per share (a $5,000,000 investment), and the company grants 20 percent warrant coverage, the company issues the investor $1,000,000 in warrants, or, in technical terms, warrants to purchase 200,000 additional shares at $5 per share at the exercise price of the stock purchased.

Because the underlying shares would be issued at the same price as is already being paid for the stock, this would not provide any further downside protection to the investor in the short term. The warrant coverage, on the other hand, would provide the investor with further upside in the event that the firm goes public or is sold at a price more than $5 for each share.

Warrant Coverage FAQ

How does warrant coverage work?

Generally speaking, warrant coverage is an arrangement between a firm and one or more shareholders under which the company issues a warrant equal to a percentage of the total monetary amount of the investment. Warrants, which are similar to options, enable investors to purchase shares at a certain price in the future.

What is warrant coverage in venture debt?

A warrant in debt is similar to a stock option. ... Put Warrants – This gives the lender the security to sell a given quantity of shares for an agreed price on or before a date that is agreed during negotiations.

Further Reading